Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

TPP: some more economists

In a post a couple of weeks ago, I highlighted the comments several New Zealand economists had made about the TPP agreement. Reasonably enough – since to evaluate the full detail involves a great deal of in-depth work – none seemed overly confident in their views, but none seemed to see the agreement as any sort of landmark beneficial economic advance for New Zealand.

Since then, a couple of other economists have put views on record. Jim Rose, a consultant who has worked for various New Zealand and Australian government agencies (including the Australian Productivity Commission), starts by observing that the “correct” economists’ reaction to regional trade agreements, in principle, would be one of “lukewarm opposition”, reminding us that this is also the stance of Paul Krugman who – whatever his politics – built a stellar academic career thinking about trade issues.

Regional trade agreements risk making all parties to the deal worse off, not better off – by increasing trade between country pairs that are party to the agreement, rather than those best able to produce goods and services most efficiently. The Australian Productivity Commission has been quite forthright in highlighting this risk as regard Australia’s various regional trade agreements (including CER, but most notably including the US-Australia FTA). A new, quite recent study, by Shiro Armstrong, a senior academic at the Australian National University, reviewed the US-Australia FTA. He concluded

Australia’s historic trade liberalization efforts produced clear welfare gains, and the winners and losers from these reforms were determined by market forces and competition. Trade agreements that introduce distortions and discriminatory treatment mean that winners and losers are largely determined by preferences and privileges assigned through negotiated treaties.

The US agreement carries important lessons for Australia in its future trade and foreign policy strategy. The conclusions of the Productivity Commission’s review apply to AUSFTA. Deals that are struck in haste for primarily political reasons carry risk of substantial economic damage. The question then is whether the economic costs of such policies are worth whatever the political gain, and indeed, how the balance of properly calculated political gains and costs might look.

Rose’s stance is informed by this sort of literature and experience, which barely seems to have factored in the New Zealand debate around regional trade agreements (and does not appear in the government’s National Interest Assessment).

Rose also highlights a number of other potential problems in the TPP

Trade agreements should not include labour or / and environmental standards as they, for example, limit our right to deregulate our labour market. Be careful what you wish for when you oppose international agreements on sovereignty grounds.

The intellectual property chapters of the TPP are truly suspicious. With each new day, the case for patents and copyrights is weakening in the economic literature. Some have made powerful arguments to abolish patents and copyrights altogether.

There are modest extensions of the term limits of drug patents and much more mischief on copyright terms. These should be watched carefully in future trade talks and one day will be a deal breaker.

Good arguments can be made against investor state dispute settlement provisions even after the carve-outs. These provisions have no place in trade agreements between democracies.

Notwithstanding all this, Rose’s bottom line is

For this lukewarm opponent of regional trade agreements, the TPP is a so-so deal with small net gains. There is no harm in it signing it.

I’m not entirely sure why he feels safe in concluding that there are net gains, but he appears to put some reliance on the modelling work suggesting that reductions in tariffs and non-tariff barriers will have some beneficial economic impact for New Zealanders.

Another independent consultant, Ian Harrison, has today released a fairly critical evaluation (trenchantly headed “Garbage In, Garbage Out”) of the modelling work, on tariffs and non-tariff barriers, that was done for MFAT and the government. That modelling is the basis for the government’s claims about the scale of the economic benefits the agreement offers.

Ian has gone back and looked at some of the papers that underpinned the assessment of the possible gains from the reduction/elimination of non-tariff barriers and improvements in trade facilitation (eg reducing customs clearances delays). In fairness, the authors of the MFAT modelling do discuss how shaky much of this work inevitably is – since there are not good, or agreed, metrics for non-tariff barriers (in a way that there are for tariffs), but the rather shaky foundations seems to have been obscured in the politicized debate around the size of any benefits. And the original authors seem to have done, or reported, little in the way of either sensitivity or plausibility analysis around the metrics they were using.

The Harrison paper suggests that the inputs are sufficiently flawed – suggesting, for example, that New Zealand and Australia start with some of the highest non-tariff barriers around – that no serious evaluation of any gains from TPP can be done using them. It is a difficult paper to excerpt, but I would suggest reading it.

Harrison also argues that there something distinctly odd about the estimated trade facilitation benefits, estimated at $357 million per annum. He highlights the hugely, and implausibly, high estimates that appear to be assumed for the value of clearing products just a few hours earlier. For some goods, those estimates might be very large – but for most of sorts of products New Zealand trades in they won’t be. If Harrison is correct, the model assumes, for example,

that an oil importer values oil received in 30 days time at a third less than oil received today because of the time value effect.

The non-tariff gains dominate the estimated benefits in the National Interest Assessment. But Harrison also comments more briefly on the estimated benefits from reduced tariffs and increased (export) quotas

Perhaps Harrison is missing something, but on the face of it this report seems to reinforce the case for an independent assessment of the economic costs and benefits of the deal, as finally agreed, perhaps by someone like the Productivity Commission. It is hard to do such an exercise well – a point Rose makes – and reasonable people will still likely differ, but for such an extensive agreement it should be an almost automatic step in the process if we are serious about considered evaluation of policy.

The issue now isn’t really whether the deal should be ratified by the New Zealand government, but whether – having been agreed – it represents a good deal for New Zealanders. Regional trade deals often haven’t been. Perhaps this one is different. But without the detailed analysis and scrutiny it will be difficult to know.

9 thoughts on “TPP: some more economists”

The TPP is very simply, Obama’s (on behalf of a US) response to the Chinese Free Trade Agreement and China’s increasing economic dominance within the 12 signing parties. The TPP still needs to be approved by Congress as far as I am aware. Certainly I can see the Chinese do not support it as they are not part of the deal and with funds to burn they certainly have got the “rent a crowd natives” organised.

Interesting post, Michael. I was actually just reading this paper by Alessandria, Kaboski, and Midrigan (http://www.virgiliumidrigan.com/uploads/1/3/9/8/13982648/aer.pdf). It has a fair amount to say about trade delays causing large economic costs. They argue that if importers have time delays (~30 days) in acquiring imported goods, fixed costs (~4% of the value of imports, or <1% of annual revenues) associated with importing (duties, regulatory barriers, etc), and inventory carrying costs (~3% of the value of inventories) the 'tariff equivalent' of these frictions is about 20%. They point out that this is over 5 times larger than observed trade costs. They go on to show that getting rid of the delivery lag only (i.e. goods delivered immediately rather than in one month's time) reduces the tariff equivalent by two thirds.

Seems to me that the paper makes the point about your oil example ("that an oil importer values oil received in 30 days time at a third less than oil received today because of the time value effect.") entirely reasonable. Well, reasonable if we think that it's not just the time value effect that matters, but the additional costs incurred by having to carry extra inventories and occasionally having to incur the fixed costs of importing when you would rather not.

Thanks James. Sounds like an interesting paper (and I’ll send it on to Ian H). In principle, some of those points sounds like costs of uncertainty about how it takes to clear customs, rather than of the mean number of days wait? And the inventory carrying costs sounds large – after all, large corporates in NZ are presumably paying financing costs of less than 1% per month.

Thanks Michael. In all my time in the NZ public service dealing with international economics and MFAT, I never heard the word trade diversion mentioned once, much less spaghetti bowl effects and trade deflection.

Whenever I did bring it up, people were clueless as to what I was talking about.

By the way, on Paul Krugman, I refer to the first and second Paul Krugman in my writings.

Krugman’s writings prior to the election of George Bush made him him the heir apparent to Milton Friedman as the leading communicator economic ideas to the public.

Krugman has a long history of bitterness – feuding with people for decades on the basis of perceived slights. He still cannot get over Robert Reich for some slight in 1984.

As for when Laura D’Andrea Tyson got the job of chairman of council of the economic advisers to Bill Clinton rather than him, Krugman’s best work came as a result of his fury over that loss of preferment.

Closest mention of trade diversion in the National Interest Analysis is this paragraph “The counterfactual scenario – New Zealand standing aside from the opportunities of TPP – risks marginalisation and decline for New Zealand in the region. New Zealand’s competitiveness in TPP markets would be eroded, and trade and investment would be diverted away from New Zealand to other TPP members.”

A word search for the diversion revealed nothing and for divert revealed 3 hits.

I will put in an official Information Act request to see if the word trade diversion appeared in any ministerial briefings or in the working documents for the National Interests Analysis